Federal ACA Exchanges and Tax Credits: Two Federal Circuit Courts Issue Contradictory Rulings

Two courts ruled differently on July 22^nd on the issue of allowing tax credits to be used to reduce premiums on health insurance purchased through federally-run Affordable Care Act (ACA) exchanges. A three-judge D.C. Circuit panel decreed that consumers in the three dozen states with federal ACA exchanges are not eligible for subsidies, whereas the Fourth Circuit came to the opposite conclusion. The states in question have federal regulators because they opted not to establish state-run exchanges.

In the D.C. decision, the majority cited the ACA’s text, which limits the availability of subsidies to exchanges established by states. This ruling reverses a D.C. Federal Court decision from January that said the ACA’s full text clearly supports federal exchanges. The panel’s ruling was stayed pending the outcome of a rehearing requested by the Obama Administration before the full D.C. Circuit. The panel was split by party lines, two Republican-appointed judges to 1 Democrat. A rehearing will put the panel’s decision in jeopardy as Democratic judges have a three-seat majority.

Although the ACA contains debatable language, the Fourth Circuit found that federal regulators adopted an “entirely sensible” reading that had the effect of “furthering the goals of the law.”

The inability of consumers to use the tax credits would deal a serious blow to the ACA because almost 90 percent of shoppers in the first open enrollment period offset their premiums via these subsidies. Particularly hard hit would be lower-income Americans who had premiums reduced by hundreds of dollars each month.

Even if the D.C. Circuit reverses the panel’s decision, as it is expected to do, two other tax-credit challenges are proceeding in other courts, one of which is the Seventh Circuit, which holds a 7-3 advantage in GOP-nominated judges. The issue being ultimately decided by the Supreme Court is likely.

Crowell & Moring’s public policy group is available to discuss the impact of these decisions and will monitor future developments. In addition, Crowell & Moring’s attorneys are available to assist insurers who participate in federally-run exchanges.